In this Issue
Leopard Asia Frontier Fund (LAFF) USD A-shares gained 6.0% in January 2013, outperforming both the MSCI Frontier Markets Asia Index (+5.7%) and the MSCI World Index USD (+5.0%).
In January, indexes within the LAFF universe were all positive with the exception of Cambodia, which was unchanged. Laos performed best, gaining 18.0%, followed by Vietnam (+16.0%). Laos' solid growth was sparked by foreign buying interest and cheap valuation in a national energy company. Despite the Laos Securities Exchange's (LSX) small market capitalization, it has continued to deliver sizeable returns to investors. Vietnam's strong performance was a result of key government efforts to lower interest rates and curb inflation that boosted confidence in the market. Another important measure is a proposed increase to the current 49% ceiling rate of foreign ownership for listed companies. The Vietnamese government has also attempted to control the gold market, limiting investors' ability to buy gold from banks, and it is expected that investors will redirect some of these deposits into the equity market. Valuation-wise, the market in Vietnam is in our view extremely cheap right now.
In January we added one new stock in Vietnam, a steel pipe producer. We also invested in 10 new stocks on the Mongolia Stock Exchange all from the consumer staple or mining sectors. Due to the extreme illiquidity of listed stocks in Mongolia we implemented a basket stock approach until liquidity increases. One of the recently acquired stocks has already gained 42.4% since the purchase.
As of January 31, the portfolio was invested in 94 shares, 1 closed-end fund (with 40.5% discount to NAV), 1 GDR (with 55% discount) and held 4.6% in cash. During the reporting month, we added ten new stocks in Mongolia and one stock in Vietnam. We increased existing positions in Bangladesh, Mongolia, Pakistan, Papua New Guinea, Sri Lanka and Vietnam. The stocks LAFF holds are listed on stock exchanges in Bangladesh, Canada, Hong Kong, Laos, London, Mongolia, New York, Pakistan, Papua New Guinea, Sri Lanka, Thailand and Vietnam. The two biggest stock positions are a power producer from Laos (6.2%) and a pharmaceutical company from Bangladesh (5.4%). The countries with the largest asset allocation include Vietnam (18.6%), Sri Lanka (15.6%), and Bangladesh (12.6%). The sectors with the largest allocation of assets are consumer goods (36.4%) and financials (14.3%).
Factsheets highlighting the fund's performance as of 31st January 2013 are available here:
Every month we highlight economic developments in one country within the Asia Frontier Capital Universe.
Once War-torn and Wayward, Sri Lanka Now Lauded as Asia's Next Success Story
Since Sri Lanka's 26-year civil war against the Tamil Tigers came to an end in 2009, the South Asian nation of 20 million has experienced impressive growth due to a rise in tourism and its strategic position along one of the busiest international shipping lanes in the world. The US $64 billion economy is propelled by tourism, remittances, tea, textiles, and agriculture. Sri Lanka's GDP, which grew at 8% in 2010 and 8.3% in 2011, slowed down to 6.5% in 2012 due to the country's balance of payments predicament and the sluggish performance of the global economy. However, 7.5% growth is projected in 2013 and last year's contraction will be ameliorated as tourist arrivals surge, large-scale infrastructure and port projects near completion, and Western demand for Sri Lanka's exports strengthens. Matching the country's solid GDP growth are its improvements in corporate governance. Sri Lanka was ranked as the second most improved country in the world in ease of doing business in the World Bank'sDoing Business 2013 report, the first time in seven years that a South Asian economy gained such an accolade.
Tourism is a key component of Sri Lanka's economy, with one million visitors arriving in 2012, an 18% increase from the previous year. The island was named New York Times' #1 destination in 2010, one of National Geographic's "Best Trips for 2012", and the #1 country in Lonely Planet's "Best in Travel 2013" guide. Tourist arrivals from China in 2012 grew by 58% YoY, evidencing the colossal market that the Sri Lankan tourism industry is just beginning to tap into. The tourism sector's promising outlook bodes well for complementary industries like construction, hotels, and leisure and should drive sustained growth in the Sri Lankan economy.
With the end of the civil war, infrastructure and port development have become focus areas for the Colombo government as it seeks to rebuild the country and tout Sri Lanka as an international maritime hub. The state is planning to spend US $3.7 billion in 2013 to revamp the country's damaged infrastructure, a 20% increase from last year. Reconstruction has especially focused on the Northern and Eastern Provinces, which suffered the most from decades of heavy fighting. Sri Lanka's proximity to prime international shipping lanes suggests the island could become a hotspot for global maritime trade. The Port of Colombo is one of the busiest ports in the world and a US $1.2 billion expansion project should be completed by the end of this year, growing container handling capacity by 300% and providing increased economies of scale that will benefit both importers and exporters. In addition to expanding the Port of Colombo, Sri Lanka is also constructing a billion-dollar, Chinese-financed deep-sea port in Hambantota. Once the project is fully completed, the Port of Hambantota will be the largest harbor built on land in the 21st century and will tap into the major east-west shipping lanes used by 200-300 vessels daily that pass 19 km to the south. The shipping industry currently contributes 6-8% to Sri Lanka's GDP and this should easily double in the next five years due to the port expansion projects.
Remittances sent home by Sri Lankans working abroad are the largest source of foreign exchange earnings for the country and a vital contributor to the economy. US $6 billion was sent home in 2012 by the 1.7 million Sri Lankans working overseas, accounting for 10% of the country's GDP and marking a 17% increase from the previous year. However, the nation's migrant workers have become a contentious issue in recent months after a Sri Lankan maid was beheaded in Saudi Arabia despite international condemnation - prompting the Sri Lankan government to recall its envoy to the country. This sensitive event could have major implications for the future inflow of remittances, as the majority of Sri Lanka's migrant laborers work as maids in the Gulf.
One impressive pillar of Sri Lanka's post-conflict recovery has been the performance of its stock market, the Colombo Stock Exchange (CSE). The CSE was formally established in 1985 and has a market capitalization of US $17.6 billion. After being heralded by Bloomberg as the World's Best Performing Stock Market in 2010, the bourse faced difficulties in 2012. The market lost 7.1% during the year, primarily a function of the first half of 2012 when it fell 18.6%, as tight monetary and fiscal policy led to the anticipation of an economic slowdown. The CSE performed much better in Q3 and Q4 as the Sri Lankan rupee strengthened against the dollar and many listed companies experienced better earnings than projected. International interest in the Colombo Stock Exchange piqued in 2012, with foreign investors contributing to 34% of the market's turnover. Sri Lanka recorded a record inflow of foreign capital last year of US $303.8 million.
The best-performing sector on the CSE in 2012 was the construction and engineering sector, which rose 73% on the year largely due to the IPO of Access Engineering Limited (AEL), one of the largest firms in Sri Lanka's booming construction industry. The sector's impressive growth seems likely to continue as lower interest rates will increase access to capital, kickstarting more construction projects and contributing to the gain of stocks in related industries such as cement, cables, and tiles.
The food, beverage, and tobacco sector, which makes up 18% of the bourse's market capitalization, also surged in 2012, gaining 32% on the year. This strong performance should carry into 2013 as the growing middle-class fuels domestic consumption and the number of tourist arrivals continues to grow.
2012 saw six IPOs on the Colombo Stock Exchange from companies in the tourism, energy, construction, and financial services sectors. In an attempt to boost the number of listings on the CSE this year, a proposal has been put forward in the 2013 budget to give a 3-year, half tax holiday for new companies that list before December 2013 and maintain at least 20% of their shares with the public. Such a move would help Sri Lanka's bourse by introducing more liquidity and decreasing volatility. Several state-owned enterprises are considering listing in 2013, but further details have not yet been disclosed.
The outlook for the Colombo Stock Exchange in 2013 is positive, as a relaxed monetary policy will lower interest rates, prompting more investors to turn to Sri Lanka's bourse to seek higher returns. Increased capital inflow from foreign investors should also buttress strong performance this year. Expansion in high-growth industries like tourism and infrastructure will be reflected in Sri Lanka's capital markets and stocks with exposure to these sectors are likely to benefit.
Certain questions will loom over Sri Lanka's future growth and development, however. The recent decision to impeach Chief Justice Shirani Bandaranayake was strongly condemned by the international community, and Washington warned that the move would damage post-war reconciliation and hinder foreign investment. Navenetham Pillay, the United Nations High Commissioner for Human Rights, called Bandaranayake's removal a "calamitous setback for the rule of law in Sri Lanka" and admonished Sri Lanka that it would face serious repercussions from the UN. Many critics see the dismissal as a strategic move to consolidate power - President Mahinda Rajapaksa's current administration includes three of his brothers and the impeached judge had made verdicts against the ruling government.
Another major challenge for Sri Lanka is how best to cope with the difficulties caused by US sanctions levied against Iran. The Persian pariah state is a key trading partner and the Sri Lankan economy has been hit hard by the sanctions. Up until a year ago, Iran supplied Sri Lanka with 93% of its crude oil. Sri Lanka's sole refinery, which was built to refine only Iranian light crude and will require major changes to process crude from other sources, was temporarily shut down last year due to the curtailment of Iranian imports. The island nation has since shifted to importing expensive refined oil from other Middle Eastern producers and crude oil from Iraq, Oman, and the UAE. As a result of the sanctions, oil prices have skyrocketed in Sri Lanka, with kerosene rising 49% and the country's oil imports for 2012 hitting a record US $6 billion, a 30% increase from the previous year. This enormous expenditure has strained Sri Lanka's foreign reserves and sparked protests over increased energy costs. Circumventing the sanctions, however, would surely mar Sri Lanka's relations with the US, its largest trading partner. The sanctions have also had negative ramifications for exports - Iran is Sri Lanka's second largest export market for tea, a core commodity that accounts for 12% of GDP.
Fortunately, Sri Lanka has extensive hydropower generation facilities and the Treasury Secretary recently stated that up to half of the country's power is now hydroelectric and that reservoirs are full after heavy rains in the latter part of 2012. Now that the civil war has ended, oil exploration is underway with the hopes that domestic discovery could ease Sri Lanka's massive petroleum import bill. Cairn India recently began the second phase of its oil exploration program in Sri Lanka and will announce the commercial prospects of the project by next year.
Despite concerns over political freedom and rising energy costs, Sri Lanka remains a compelling investment destination and one of Asia's most promising up-and-coming markets. The island's post-war development progress is remarkable and its continued stability will help Sri Lanka move beyond middle-income status and solidify its pertinent position as a trade and transport mecca. Sri Lanka's economic expansion will be mirrored in the country's equity market, and foreign investor interest coupled with rising domestic consumption will generate prolonged growth in the Colombo Stock Exchange.
Salike. Serendip. Ceylon. Sri Lanka. The teardrop-shaped South Asian island has changed names and rulers many times, but one thing has stayed constant: the exotic allure of the place continues to captivate adventure-seeking travelers. Fabled for its tea and spices, Sri Lanka was an integral midpoint on the Silk Road and the island was heavily influenced by the exchange of goods, ideas, and cultures from across China, India, Persia, Europe, Arabia, and Africa. Tourists began to appear in the 1960s and 1970s as a side jaunt from the Hippie Trail, but this traffic soon ceased with the outbreak of an insurgency launched by the Tamil Tigers against the government. The bloody 26-year civil war finally came to an end in 2009, and the ensuing peace has ushered in a new generation of travelers eager to discover Sri Lanka's charm.
I booked my flight to Sri Lanka upon realizing that the cheapest way to get from the Middle East to Southeast Asia was via Colombo. Arriving from Doha, I was immediately drawn to the South Asian way of life I encountered: bejeweled grandmothers in colorful sarees, chaotic trishaw traffic, and street vendors hawking everything from betel to bananas. We arrived at our guesthouse in Mount Lavinia, a beach suburb of Colombo, and walked across the nearby train tracks to take a dip in the Indian Ocean. Lunch was a tasty introduction to the wonders of the local cuisine - Sri Lankan fish curry washed down with Elephant Ginger Beer (EGB), the sweet, carbonated beverage with a bite that is ubiquitous across the island as the preferred mixer to use with coconut arrack, the national liquor.
Our time in Colombo was short, as we had an ambitious itinerary to see as much of the island as possible in two weeks. We rushed off the Colombo Fort Railway Station to reserve a ticket in third class for the scenic train to Kandy, the second largest city in the country and the capital of Central Province. Sri Lanka's impressive railway network was developed by the British colonial government in the mid-1800s as a way to move Ceylon's valuable tea from the Hill Country to the Port of Colombo. To this day, using trains to traverse the island is one of the best ways to experience Sri Lanka's astonishing diversity of landscapes and share exotic snacks with the locals, all while creaking along the tracks on an antique locomotive. We found a prime seat in the corner and spent most of the journey hanging out of the windowless train, buying "short eats" - the Sri Lankan moniker for snacks. I quickly established my favorites were curried rotis, mutton rolls, and fried lentilvadas
Kandy is buzzing with tourists, despite the colonial-era curfew that keeps the nightlife sparse (even by Sri Lankan standards). It is a scenic city that surrounds the centrally-located Kandy Lake. We enjoyed strolling the city's old streets and observing the colonial architecture, stopping often for unusual local dishes and drinks. The main draw in the town is the Temple of the Tooth Relic, a revered spot for Sri Lanka's Buddhist community that locals believe contains the original sacred tooth of the Buddha.
Next we headed north to Sigiriya, a UNESCO World Heritage site famous for "Lion's Rock", a massive rock fortress and temple ruin that towers over the surrounding flatlands, offering incredible panoramic views as far as the eye can see. The strenuous steps up the boulder were well worth the climb. The ancient cave paintings and summit ruins amazed us and even walking around the surrounding moat was eventful - my friend's curried rice dish was snatched from his hands by a cheeky pack of purpled-faced leaf monkeys, a whiskered primate endemic to Sri Lanka.
The chilly hill station is a great base for visiting Horton Plains National Park, a diverse cloud forest that was definitely the highlight of my trip. In addition to the breathtaking World's End, a 870 m sheer precipice, the park boasts incredible biodiversity and a rich array of flora and fauna. Because it is a protected area, the park officials made sure that we didn't bring in any plastic or non-decomposable goods, a welcome measure to preserve the pristine environment.
Leaving the highlands, we journeyed south to visit Sri Lanka's main safari reserve, Yala National Park. The ocean-side location along with the elephants, crocodiles, and leopards that can be spotted in the park make it one of the island's biggest tourist draws. After hurtling around in smoke-belching Jeeps with binocular-laden tourists trying to catch a glimpse of the elusive leopard, we realized we would have been more interested in a scenic walking tour. Continuing onward, we followed the coastline to Unawatuna, a beachside surfer's town with pristine beaches, a relaxed ocean vibe, and tasty seafood. We took advantage of the cheap, fresh tuna steaks and watched the sun go down the same way that many of the locals do - on the beach with a ginger beer and coconut arrack drink in hand.
Finally, we headed north to Galle, a historic city heavily influenced by Dutch and Portuguese settlers. Walking on the fortified walls of the UNESCO site, alongside the Indian Ocean, we saw locals cliff-diving off the sides of the landmark as foreign and local tourists stared in amazement. Galle Fort is an interesting remnant of the cultural mix between Europe and Asia, and the old city's picturesque, pedestrian-friendly streets make it clear why Galle still attracts travelers.
As a relatively small island, Sri Lanka is an ideal place for the adventurous traveler - it offers a remarkable diversity of options, from beaches to hill towns, ruins to safari parks. The warmth we encountered from all of the Sri Lankans we met was unmatched by any other place I've traveled to, especially considering the island's recent war-torn past. Even though Sri Lanka lacks nightlife, we were content to spend our evenings eating delicious coconut fish curry home-cooked by the smiling proprietors of the family-owned guesthouses where we stayed. Easy to reach from Europe, Asia, and the Middle East, the Pearl of the Indian Ocean - with its rich culture, impressive sights, and flavorful cuisine - will continue to lure travelers for years to come...
Capitalist Exploits Interview
Fund Manager Thomas Hugger was recently interviewed by Capitalist Exploits about Leopard Asia Frontier Fund and investing in frontier markets. You can read the interview here.
Emerging Frontiers Blog
We invite you to stay updated with daily investment news and analyses within Asian frontier markets by visiting Leopard Capital's free Emerging Frontiers Blog. Emerging Frontiers now includes news and analysis from all countries within the Leopard Asia Frontier Fund universe.
This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.
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